Businesses search policy cracks for coverage after California earthquake

A 6.0 magnitude earthquake—the biggest to hit California since 1989—struck the heart of the Napa and Sonoma wine region August 24, bringing to light a harsh reality about earthquake insurance: not many homeowners or businesses have it.

“Just about everyone is underinsured when it comes to earthquakes,” said Dante Disparte, managing director, Clements Worldwide. “Even if an earthquake has happened in your state, you think, ‘well, it hasn’t happened to me.’ ”

Standard homeowners, renters and business insurance policies do not cover earthquake damage.

According to the California Earthquake Authority, created by the state legislature two years after the devastating Northridge Earthquake, less than 6 percent of homeowners and renters in Napa have coverage for earthquake damage. About only 10 percent have the coverage throughout California.

Loretta Worters, vice president of the Insurance Information Institute, said, “Large businesses that have risk managers, tend to buy the coverage, whereas small to medium size businesses—particularly start-ups—do not buy the coverage.”

Denial isn’t the only reason to skip earthquake coverage. “There are usually very large deductibles with earthquake insurance and the industry has a history of paying less than owed on earthquake claims,” Tony Braga, director at disasterprepared.net, told Advisen.

According to the Insurance Information Institute, deductibles range from 2 percent to 20 percent of the replacement value of the insured structure. A standard homeowners’ policy from the CEA includes a 15 percent deductible.

Also, the premiums tend to be high and the limits low, he added.

The hurdles to recover on the policies can also be as high as the premiums, especially on commercial property.

“Most commercial property insurance policies have a dual trigger for a loss to be valid,” said Gavin Shiels, director, San Francisco property leader at Aon Risk Solutions. “The first is that direct physical damage must be suffered by the insured, and the second is that the direct physical damage must be caused by a covered cause of loss.”

The high costs and deductibles and low limits not only are a deterrent for potential purchasers, they frequently are a source of disappointment to those that do buy, according to David Weiss, partner, Reed Smith’s litigation insurance recovery group.

“People are often shocked at how little money they recover when they make a claim,” he said.

Still, he always advises clients who have earthquake insurance to file a claim.

“This is why you bought the insurance,” he said. A common mistake is for business owners to think of earthquake insurance the same way they might auto or home insurance. Filing an earthquake claim won’t trigger a premium increase; it’s an event over which the policy owner has no control,” he said.

In the absence of earthquake coverage, it still might be worthwhile to file a claim under another policy. “If your business has a fleet of cars, your auto policy may not have an earthquake exclusion,” said Weiss. “It’s worth examining all your policies for what I call `hidden coverage.’”

However, even businesses with clear-cut claims under earthquake coverage still need to be diligent to get the full value from their policies, according to Linda Kornfeld, a partner in the insurance recovery group at Kasowitz Benson Torres & Friedman.

Kornfeld has extensive litigation experience in property and business interruption losses stemming from such high-profile events as the 2011 floods in Thailand and Superstorm Sandy.

“In any disaster or extraordinary event, the most important first step for any business is to pull out all of their policies and read them carefully,” she said. “Earthquake policies are highly customized—there is no one-size-fits-all boilerplate being used, so you need to understand how your policy works and where the pitfalls may be.”

Based on precedent from Superstorm Sandy, business interruption losses may be covered even if there is no coverage for property loss related to a flood or an earthquake, according to Kornfeld.

“An exclusion for one thing doesn’t mean an exclusion for everything,” she said. “For example, in Napa, a winery may not be covered for the loss of barrels of wine but a careful review of the policy may make it possible for the winery to recover some lost income.”

It’s also critical to pay attention to the procedural aspects of your policies: how quickly after an event must you notify the insurer, how losses must be documented; and requirements and deadlines for proof of loss. “Failures to comply with these technical requirements could disqualify an otherwise valid claim,” she said.

Finally, she cautioned businesses to be mindful about their internal communications, particularly in the immediate aftermath of an event like an earthquake.

“If there is any dispute about coverage, the insurance company may seek your internal communications,” she said. “Any confusion you express or a lack of understanding about the policy or any sensitive issues might be a basis for your claim to be to be denied.” She advised using the business’s attorney to aid in internal communications if there is any confusion.

For businesses that didn’t suffer direct physical damage from the earthquake but are affected by it, there may be remedies available if they have contingent business interruption coverage.

However, the coverage—usually offered to an insured for a loss in earnings as a result of damage to a supplier, or customer that thereby prevents the policyholder from earning their usual revenues—is expensive and offered only with small limits, according to Shiels.

“One of the key concepts of this coverage is that the covered perils for the CBI loss will follow the covered perils that the insured purchased,” he told Advisen. “If the insured has not purchased earthquake coverage but has CBI coverage, a loss related to an earthquake to a key supplier or customer would likely not be covered.” Also, there would be parity between the deductibles for the insured and the holder of the CBI coverage; thus further limiting the potential remedy.

For businesses that aren’t mired in trying to figure out the minutiae of their policies, this latest catastrophic quake should serve as a wake-up call. It’s an opportunity to evaluate their coverage — types, amounts, deductibles, covered events — and weigh the pros and cons of securing the appropriate policies.

“You have to look at what the cost to your business would be by investing in the coverage. That means looking at what not having that money available to you would be versus the effect on your business of having to absorb the financial loss in the event of an earthquake or similar event,” said Weiss.

Dan Weedin, a Seattle-based insurance and risk-management consultant, advised any holder of earthquake insurance to make sure loss of income for an adequate amount is included as part of the earthquake policy. Just securing property protection is a common error in judgment.

“Such coverage is costly, but looking at the pictures from Napa, I’m going to bet people would rather have bitten the bullet and bought insurance rather than have to stomach the out-of-pocket costs now,” he observed.

Businesses that depend heavily on wineries and vineyards should consider purchasing business income for dependent properties insurance (which may or may not be sold as part of a commercial property policy, depending on the agent), said Weedin.

“This is an overlooked coverage for many businesses and you may have to ask your agent for it,” said Weedin. “It will protect you if your key supply chain partner suffers the loss and you don’t, and you lose income from their loss.”

The catch: You must have coverage for the triggering event as well as the business income for dependent properties insurance. So, in the case of the recent earthquake, a restaurant that suffers a loss because of a winery’s inability to supply would have to have had earthquake insurance. On the plus side, the winery’s coverage is irrelevant.

One business not yet worried about possible supply interruption from the earthquake is Gary’s Wine, one of the premier online wine dealers in the U.S.

“It’s too early to tell what the damage is and what effect it will have on vineyards’ ability both to ship product and produce it going forward,” said Anthony Bencivenga, general manager at Gary’s Wayne, NJ location. “At least in our case, there’s a lot of product that we hadn’t actually committed to yet.”

Business’s concerns are understandable if not necessarily well-founded. He pointed out that people in the wine industry had many of the same worries after the 2010 tsunami in Chile, which proved to have little effect on the wine business.